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Research: Industrials
Weaker global automotive production in 2024 is proving a challenge for Dowlais Group. Benefits from the restructuring programme and market recovery in 2025/26 should still see target double-digit margins achieved, driving earnings and cash generation. More important in the short term is the announced strategic review of Powder Metallurgy (PM). This could offer a step change in the market’s appreciation of the value of the company’s portfolio of assets.
Dowlais Group |
Powder Metallurgy in the spotlight |
Interim results |
Automobiles and parts |
19 August 2024 |
Share price performance
Business description
Next events
Analyst
Dowlais Group is a research client of Edison Investment Research Limited |
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Weaker global automotive production in 2024 is proving a challenge for Dowlais Group. Benefits from the restructuring programme and market recovery in 2025/26 should still see target double-digit margins achieved, driving earnings and cash generation. More important in the short term is the announced strategic review of Powder Metallurgy (PM). This could offer a step change in the market’s appreciation of the value of the company’s portfolio of assets.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/22 |
5,246 |
212 |
(15.3) |
0.0 |
N/A |
N/A |
12/23 |
5,489 |
264 |
13.8 |
4.2 |
4.6 |
6.5 |
12/24e |
4,987 |
207 |
11.0 |
4.2 |
5.8 |
6.5 |
12/25e |
5,107 |
247 |
13.4 |
4.2 |
4.9 |
6.5 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
H124 results
Underlying sales declined by 5.1% due to weakness in ePowertrain (c 25% of group sales), reflecting the disruptions being seen in the EV market as adoption growth rates have slowed. The other activities – Driveline (-1%), China (+7%) and PM (+0.2%) – outperformed their markets. Adjusted operating profit fell 9.0% to £151m, with margin declines limited to 30bp (5.9%) as management actions on costs and restructuring limited the drop through. These actions, including plant rationalisation in North America, are expected to improve the operating margin in H2. Adjusted PBT of £95m (down 26%) was further affected by financing costs following the demerger. EPS of 4.9p was down 30%. The dividend is held at 1.4p/share. Net debt increased to £915m, net debt/EBITDA 1.6x.
Corporate activity
Management has announced a strategic review of the PM business, with a disposal an obvious possibility in the array of options to be considered. The group has also sold its loss-making hydrogen storage business (£7m in H124), reflecting the investment required and significantly improving group cash flow.
Outlook and forecasts
Management is guiding to a ‘mid to high single-digit adjusted revenue decline and adjusted operating margin between 6.0% and 7.0%’ for FY24. We have also factored in an additional currency impact. We forecast adjusted PBT of £207m (from £247m) and adjusted EPS of 11.0p (from 13.1p) in FY24 and adjusted PBT of £247m (from £297m) and adjusted EPS of 13.4p (from 16.1p) in FY25.
Valuation: Discount to peers with potential catalyst
A combination of automotive share price weakness (the sector is down c 20% from its peak in April) and reduced expectations for Dowlais affects our peer-based valuation. Our drivetrain automotive peer group-derived valuation comes to 107p/share (from 143p) and our aspirational double-digit margin automotive peer group valuation comes to 138p/share (from 182p). Arguably more important is the potential catalyst of the PM strategic review in highlighting the value of the portfolio.
Interim results
Overview
Underlying sales declined by 5.1% due to weakness in the ePowertrain product line in the Automotive business (c 25% of group sales), reflecting the disruptions being seen in the EV market as adoption growth rates have fallen short of expectations. Driveline, China and PM outperformed their markets. Adjusted operating profit fell by 9.0%, with margins down 30bp from the lower volumes, although management actions and the restructuring limited the drop-through impact.
Exhibit 1: Adjusted headline results
£m |
H123 |
H124 |
Change (constant FX) |
Revenue |
2,830 |
2,571 |
-5.1% |
Adjusted operating profit |
177 |
151 |
-9.0% |
Adjusted operating margin |
6.3% |
5.9% |
-30bp |
PBT |
139 |
95 |
-26% |
Basic EPS (p) |
7.2 |
4.9 |
-30% |
DPS (p) |
1.4 |
1.4 |
0% |
Source: Dowlais Group
Automotive
Driveline, the core powertrain-agnostic business, outperformed the end-market with an underlying sales decline of 1% against a production rate decline of 2.4% in the light vehicle market excluding China. The longstanding China JV grew 7%, outperforming market growth of c 4%, with continued gains with local original equipment manufacturers (OEMs) and Dowlais supplying all of the top 10 largest manufacturers. ePowertrain declined by 20%, driven by a double-digit decline in All-Wheel Drive systems (AWD) largely due primarily to market disruptions from the lower EV volumes in Europe in three programmes and launch delays to a fourth in North America, highlighting the potential impact when value per vehicle can be more than £1,000 against £50–100 for Driveline. Management action limited the impact on profit, with drop through to 17% from the standard 30%, while the division also benefited from a strong profit performance in China.
Exhibit 2: Adjusted Automotive performance
£m |
H123 |
H124 |
Change (constant FX) |
Driveline |
1,272 |
1,209 |
-1% |
ePowertrain |
714 |
538 |
-20% |
China |
258 |
259 |
7% |
Other |
39 |
38 |
3% |
Total revenue |
2,283 |
2,044 |
-6% |
Operating profit |
149 |
122 |
-13% |
Operating margin |
6.5% |
6.0% |
-50bps |
Source: Dowlais Group
Order intake remains positive with an intake lifetime value of £2.4bn. This is below the £3bn in the previous year, reflecting lower wins in the EV business (53% of book in 2024 against 78% in 2023), in line with the future market but also reflecting the re-evaluation taking place by OEMs of the EV transition pathway.
Powder Metallurgy
Sales were broadly flat, outperforming automotive markets, which account for c 80% of sales. EV and powertrain-agnostic body and chassis components grew 3%, while the more internal combustion engine (ICE) orientated chassis and transmission business declined by 1%, in line with the market. Underlying operating margins pre-FX impact improved 50bp, benefiting from the resolution of some of the operational issues experienced in FY23.
Exhibit 3: Adjusted PM performance
£m |
H123 |
H124 |
Change (constant FX) |
Sinter |
417 |
400 |
-0.5% |
Additive |
13 |
14 |
19.0% |
Powder |
115 |
113 |
0.9% |
Total revenue |
545 |
527 |
0.2% |
Operating profit |
50 |
50 |
6.0% |
Operating margin |
9.2% |
9.5% |
50bps |
Source: Dowlais Group
Order intake grew 10%, with 53% to transmission-agnostic sectors. The nascent magnets business continues to generate interest with an increase in quotations from OEMs and tier one suppliers.
Cash flow
Cash flow witnessed the normal seasonality in working capital, which is expected to unwind in H2, strong dividend payments from the group’s Chinese JV of £70m and continued high restructuring spend (the programme is due for completion in FY25). Free cash generation was broadly flat with shareholder returns from dividends (£39m) and commencement of the share buyback programme (£9m) leading to net debt of £915m up from £849m at end FY23, with net debt/EBITDA of 1.6x.
Exhibit 4: Group cash flow
£m |
H123 |
H124 |
Adjusted operating profit |
177.0 |
151.0 |
Adjusted EBITDA |
306.0 |
281.0 |
Equity accounted investments |
(27.0) |
(43.0) |
Adjusted operating EBITDA |
279.0 |
238.0 |
Net change in working capital |
(55.0) |
(50.0) |
Restructuring & other |
(82.0) |
(71.0) |
Pension etc |
(11.0) |
(9.0) |
Operating cash flow |
131.0 |
108.0 |
Net interest |
(20.0) |
(46.0) |
Dividends received |
33.0 |
70.0 |
Total tax paid |
(28.0) |
(26.0) |
Net capex |
(122.0) |
(101.0) |
Free cash flow |
(6.0) |
6.0 |
Equity dividends paid |
0.0 |
(39.0) |
Shares issued/(repurchased) |
(7.0) |
(9.0) |
Net cash flow |
29.0 |
(40.0) |
Source: Dowlais, Edison Investment Research
Corporate activity
Management’s focus on shareholder value as a sole listed entity following the demerger from Melrose has led management to reassess the shape of the group. This has seen two significant actions in the year:
■
Strategic review of PM: Dowlais has announced a strategic review of the PM business, reflecting the Tier 2 nature of the business and limited fit against the Tier 1 nature of the Driveline business, and confirming a process it committed to at the time of demerger in 2023. Melrose first looked at selling the business in 2018, with the press reporting offers of c £1.6bn. Clearly, much has changed since then with returns lower, interest rates higher and the business having to navigate the ICE/EV transition. Indeed, in the H124 results the NAV for PM is £860m (assets: £1,251m, liabilities: £391m). This translates to an EBIT multiple of 9.0x and EBITDA multiple of 5.9x based on FY23 results. The strong market position of the business (market leader in sinter and number two in metal powders) suggests it is a premium asset that should attract broad interest. However, the strategic review will consider alternatives including the potential to being in partners to assist developing the nascent magnets business.
■
Disposal of hydrogen: as part of the demerger portfolio, Dowlais inherited an early-stage hydrogen storage technology business, using metal powders to effectively absorb hydrogen, which could then be released. As the business is at an early stage, it requires significant investment and incurs large losses (H124: £7m loss reported). The drain in terms of cost and cash, along with the inevitable uncertainties, arguably exacerbated by the slow adoption of hydrogen, has led management to dispose of the business to Langley Holdings for a nominal consideration. While the transaction will incur an asset impairment of £18m (£10m of which was accounted for in H1), it also eliminates the significant future cash drain.
Outlook
The shorter-term outlook is challenging, with automotive production now expected to be down c 2% in the year with the majority of this in the second half. The volatility being seen in the EV market appears set to continue, reflecting the slower growth in adoption rates. Management has limited profit drop through in the first half (automotive ePowertrain 17% versus the standard 30%) and will take further actions as end-markets necessitate.
The longer-term outlook remains more robust, with the market expected to show a CAGR of 2–3% in 2025–26, offering positive operational gearing. In addition, management remains confident that the current restructuring will offer 200bp of margin upside. Indeed, management retains its medium-term target of 10%+ operating margins.
Guidance and forecasts
Management has guided to a ‘mid to high single-digit adjusted revenue decline for 2024 and an adjusted operating margin between 6.0% and 7.0% in constant currency, as commercial recoveries, restructuring savings and ongoing performance initiatives limit the impact on operating profit from lower volumes’. This suggests a slight deterioration in end-markets, which S&P now forecasts to be down 2% for the year globally. We note that the slowdown in EV adoption in particular is now appreciated by OEMs, which should assist future scheduling in this segment, while the company will continue to benefit from the restructuring programmes.
In addition, we note the following:
■
Currency movements are currently negative for the group. Rates for the remainder of the year would affect revenue by £200m (£114m impact in H1) and EBIT by £17m (£10m impact in H1).
■
Hydrogen losses will be eliminated from the second half post disposal but the business will not be reclassified as a ‘loss on disposal’.
■
Central costs were lower than anticipated in H1 but guidance for the full year remains unchanged.
Exhibit 5: Changes to forecasts
£m |
FY24e |
FY25e |
||||
Old |
New |
Change |
Old |
New |
Change |
|
Revenues |
5,350 |
4,987 |
(6.8%) |
5,477 |
5,107 |
(6.8%) |
Adjusted operating profit |
356 |
314 |
(12.0%) |
406 |
360 |
(11.3%) |
Targeted operating profit margin (ex-central costs) |
7.3% |
7.1% |
(0.2%) |
8.2% |
7.8% |
(0.4%) |
Adjusted operating profit margin |
6.7% |
6.3% |
(0.4%) |
7.4% |
7.1% |
(0.3%) |
Adjusted PBT |
247 |
207 |
(16.4%) |
297 |
247 |
(16.7%) |
Basic EPS (p) |
13.1 |
11.0 |
(15.8%) |
16.1 |
13.4 |
(16.9%) |
Dividend per share (p) |
4.2 |
4.2 |
0.0% |
4.8 |
4.2 |
(13.1%) |
Net cash/(debt) |
(852) |
(907) |
6.5% |
(794) |
(899) |
13.3% |
Source: Edison Investment Research
Valuation
Our preferred method for valuing Dowlais is peer based. Peer group 1 has drivetrain/powertrain operations along with other predominantly automotive activities. Peer group 2 comprises automotive stocks generating double-digit EBIT margins, in line with the company management’s target.
Exhibit 6: Peer valuation
Market cap |
EV/EBIT (x) |
EV/EBITDA (x) |
P/E (x) |
||||||
£m |
2024e |
2025e |
2024e |
2025e |
2024e |
2025e |
|||
Dowlais |
810 |
5.5 |
4.8 |
2.9 |
2.7 |
5.4 |
4.5 |
||
Peer group 1 |
|||||||||
American Axle |
600 |
13.6 |
12.8 |
4.5 |
4.4 |
20.7 |
11.8 |
||
Dana |
1,179 |
7.7 |
6.5 |
3.9 |
3.6 |
10.8 |
6.6 |
||
Linamar |
2,202 |
4.4 |
4.2 |
2.8 |
2.7 |
6.1 |
5.8 |
||
Magna |
8,740 |
7.7 |
6.7 |
4.6 |
4.1 |
9.7 |
8.2 |
||
Valeo |
1,972 |
7.3 |
5.4 |
2.3 |
2.0 |
7.7 |
4.1 |
||
Vitesco |
1,784 |
5.3 |
3.6 |
2.0 |
1.7 |
9.7 |
6.8 |
||
Median |
7.7 |
6.5 |
3.3 |
3.1 |
10.8 |
7.2 |
|||
Peer group 2 |
|||||||||
Autoliv |
5,963 |
8.6 |
7.1 |
6.2 |
5.3 |
11.1 |
8.8 |
||
Borg Warner |
2,753 |
9.0 |
8.1 |
5.5 |
5.1 |
11.0 |
9.7 |
||
Brembo |
5,675 |
7.5 |
6.9 |
5.3 |
4.9 |
7.8 |
6.8 |
||
Median |
8.4 |
7.3 |
5.7 |
5.1 |
10.0 |
8.4 |
|||
Dowlais financials (EBIT (£m), EBITDA (£m), EPS (p)) |
314 |
360 |
589 |
640 |
11.0 |
13.4 |
|||
Peer group 1 valuation (p/share) |
120 |
122 |
89 |
91 |
119 |
97 |
|||
Peer group 2 valuation (p/share) |
128 |
125 |
179 |
170 |
110 |
113 |
|||
Source: Edison Investment Research, LSEG Data & Analytics. Note: Priced at 15 August 2024.
A combination of sector weakness (the auto sector is down c 20% from its peak in April) and reduced expectations for Dowlais inevitably affects these relatively short-term valuation metrics. Our average peer group 1 valuation comes to 107p/share (down from 143p/share) and our average peer group 2 valuation comes to 138p/share (down from 182p/share).
Exhibit 7: Financial summary
£m |
2022 |
2023 |
2024e |
2025e |
2026e |
||
Year to 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
|||||||
Revenue |
|
|
5,246 |
5,489 |
4,987 |
5,107 |
5,280 |
Cost of Sales |
(3,937) |
(4,611) |
(4,139) |
(4,188) |
(4,277) |
||
Gross Profit |
1,309 |
878 |
848 |
919 |
1,003 |
||
EBITDA |
|
|
594 |
618 |
589 |
640 |
694 |
Operating profit (before amort. and excepts.) |
|
333 |
355 |
314 |
360 |
360 |
|
Amortisation of acquired intangibles |
(198) |
(197) |
(197) |
(197) |
(197) |
||
Exceptionals |
(48) |
(578) |
(169) |
(40) |
(10) |
||
Associate adjustment |
(29) |
(30) |
(26) |
(27) |
(27) |
||
Reported operating profit |
58 |
(450) |
(79) |
97 |
179 |
||
Net Interest |
(121) |
(91) |
(107) |
(113) |
(112) |
||
Finance exceptionals |
19 |
||||||
Profit Before Tax (norm) |
|
|
212 |
264 |
207 |
247 |
301 |
Profit Before Tax (reported) |
|
|
(63) |
(522) |
(185) |
(16) |
67 |
Reported tax |
(14) |
27 |
40 |
(3) |
(24) |
||
Profit After Tax (norm) |
152 |
198 |
155 |
186 |
226 |
||
Profit After Tax (reported) |
(77) |
(495) |
(145) |
(19) |
43 |
||
Minority interests |
(5) |
(6) |
(6) |
(7) |
(8) |
||
Net income (normalised) |
147 |
192 |
149 |
179 |
218 |
||
Net income (reported) |
(82) |
(501) |
(151) |
(26) |
35 |
||
Average Number of Shares Outstanding (m) |
0 |
1,393 |
1,353 |
1,333 |
1,333 |
||
EPS - normalised (p) |
|
|
(15.3) |
13.8 |
11.0 |
13.4 |
16.3 |
EPS - normalised fully diluted (p) |
|
|
(15.3) |
13.8 |
11.0 |
13.4 |
16.3 |
EPS - basic reported (p) |
|
|
N/A |
(36.0) |
(11.2) |
(1.9) |
2.6 |
Dividend (p) |
0.0 |
4.2 |
4.2 |
4.2 |
4.9 |
||
Revenue growth (%) |
0.0 |
6.3 |
(6.7) |
2.0 |
3.2 |
||
Gross Margin (%) |
25.0 |
16.0 |
17.0 |
18.0 |
19.0 |
||
EBITDA Margin (%) |
11.3 |
11.3 |
11.8 |
12.5 |
13.1 |
||
Normalised Operating Margin (%) |
6.3 |
6.5 |
6.3 |
7.1 |
7.8 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
5,483 |
4,717 |
4,572 |
4,442 |
4,322 |
Intangible Assets |
3,075 |
2,365 |
2,255 |
2,145 |
2,035 |
||
Tangible Assets |
1,813 |
1,751 |
1,716 |
1,696 |
1,686 |
||
Investments & other |
595 |
601 |
601 |
601 |
601 |
||
Current Assets |
|
|
1,450 |
1,517 |
1,441 |
1,462 |
1,497 |
Stocks |
498 |
510 |
476 |
486 |
501 |
||
Debtors |
638 |
628 |
586 |
598 |
617 |
||
Cash & cash equivalents |
270 |
313 |
313 |
313 |
313 |
||
Other |
44 |
66 |
66 |
66 |
66 |
||
Current Liabilities |
|
|
(1,472) |
(1,446) |
(1,490) |
(1,514) |
(1,561) |
Creditors |
(1,188) |
(1,179) |
(1,101) |
(1,123) |
(1,158) |
||
Tax and social security |
(109) |
(100) |
(100) |
(100) |
(100) |
||
Short term borrowings |
0 |
(2) |
(100) |
(100) |
(100) |
||
Other |
(175) |
(165) |
(190) |
(192) |
(202) |
||
Long-term Liabilities |
|
|
(2,250) |
(2,222) |
(2,040) |
(1,959) |
(1,860) |
Long-term borrowings |
(1,104) |
(1,158) |
(1,120) |
(1,112) |
(1,057) |
||
Other long-term liabilities |
(1,146) |
(1,064) |
(920) |
(847) |
(803) |
||
Net Assets |
|
|
3,211 |
2,566 |
2,482 |
2,432 |
2,399 |
Minority interests |
39 |
36 |
34 |
32 |
31 |
||
Shareholders' equity |
|
|
3,172 |
2,530 |
2,449 |
2,399 |
2,367 |
CASH FLOW |
|||||||
Operating Cash Flow |
516 |
537 |
518 |
569 |
620 |
||
Working capital |
(32) |
18 |
10 |
(4) |
(7) |
||
Exceptional, pension & other |
(187) |
(168) |
(155) |
(95) |
(85) |
||
Tax |
(72) |
(61) |
(52) |
(62) |
(75) |
||
Net operating cash flow |
|
|
225 |
326 |
321 |
407 |
452 |
Capex |
(219) |
(262) |
(260) |
(282) |
(294) |
||
Acquisitions/disposals |
(3) |
0 |
0 |
0 |
0 |
||
Dividends received from JV |
59 |
63 |
70 |
56 |
58 |
||
Net interest |
(9) |
(63) |
(94) |
(98) |
(97) |
||
Free cash flow |
|
|
53 |
64 |
38 |
83 |
118 |
Equity financing/buy-back |
0 |
(7) |
(35) |
(15) |
0 |
||
Dividends paid |
0 |
(26) |
(61) |
(60) |
(63) |
||
Other |
(1,971) |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
1,038 |
31 |
(58) |
8 |
55 |
||
Opening net debt/(cash) |
|
|
(1,918) |
880 |
849 |
907 |
899 |
Closing net debt/(cash) |
|
|
880 |
849 |
907 |
899 |
844 |
Source: Dowlais Group, Edison Investment Research
|
|
Research: Healthcare
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